A.M. Best has put together a special report highlighting the life and annuity industry’s 2011 happenings and forecasting those for 2012. They released a press release summarizing their findings entitled “A.M. Best Special Report: U.S. Life/Annuity Insurers Shifting Gears in Volatile Economic Environment. Even with a plethora of large economic challenges in 2011, the life and annuity industry made it through the battle with little consequences and even had some fixed-income portfolio gains. The industry maintained good regulatory capital and operating earnings. Careful liquidity and capital management allowed the industry to improve the fundamentals of their balance sheets.
Low interest rates are definitely affecting the industry’s earnings, so they have to adapt. Annuity rates and others affected by interest rates will most likely remain low through 2014. Although the rate of growth will be slower, A.M. Best does expect positive earnings to continue. Those life and annuity companies whose earnings are not as tied to interest rates and equity markets will likely maintain better results that those who are. Product lines that are changed by the equity markets are increasing the hedging costs and reserve needs at companies. Insurance companies have taken different approaches to the risk with some closely monitoring more risk and others paring down on risky asset classes.
Some insurance companies have slightly changed their variable annuity products to stay in the market, while a few have left variable annuities behind. Others are moving away from fixed annuities and group medical and long term care insurance. Companies who are re-emphasizing whole life insurance are more favorably viewed by A.M. Best. A new deferred acquisition cost accounting system will impact shareholders’ equity as it’s introduced, but the changes will be manageable. Overall, A.M. Best seems to believe in the life and annuity industry and their future success, despite difficulties in the market.
Written by Rachel Summit
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